Sector Rotation Showing a Market Bottom?

Chris Vermeulen, whose market analysis I frequently feature, is leaning towards a market bottom based on recent market action. He is watching key sectors that generally tend to lead a market rally, such as small caps and financials.  For the full, free article click here. Below is a summary and supporting chart:

In short, I feel the market has been forming a base for almost 3 weeks. Just last week we saw the big sectors (financials and energy) reach their key support levels from several months back and that should trigger a sizable bounce and with any luck the start of another leg higher in the market.

Trading ETFs: Gaining an Edge with Technical Analysis, A Book Review

I have written a new book review on Trading ETFs: Gaining an Edge with Technical Analysis, available exclusively on Seeking Alpha. The full article is here. A summary is below:

Wagner’s approach can be applied to stocks and other trading vehicle which provides additional value to the reader interested in becoming a successful long-term trader.

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Mid-Week Readings

Below are a few articles I’ve read this week:

The 3-D Hurrican and the New Normal* (pdf) – Jason Hsu (via John Mauldin’s Outside the Box)

School Daze, School Daze Good Old Golden Rule Days – Bill Gross

The Contagion Risk of Europe – John Mauldin

7 Life Lessons from the Very Wealthy – Barry Ritholtz

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Interoute Crosses the Pacific
EU Ponys Up Some Cash For Europe-Brazil Cable
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14 Fundamentally Sound Stocks With Strong Technicals

I update the following portfolio/screen on a monthly basis on Scott’s Investments. May’s list of 24 stocks is here and the top 10 rated stocks returned an average of  .11% versus -3.95% for SPY. The entire list of 24 stocks last month returned an average of -1.83%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio 
  • low debt 
  • a history of high return on equity and investment, and 
  • price momentum as gauged by the percentage the stock is trading to its 250 day high. 
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

14 stocks qualified for this month’s list. This tells us that limited individual stock momentum exists in the market and the fundamental factors on the list can still be found among the high momentum stocks.  However, the number of qualifying stocks is less than last month’s list and substantially less than April’s 34 stocks, which is not surprising given that overall equity momentum has waned in May and June.

Two stocks are intriguing on this month’s list. EZCORP (EZPW), a short-term credit service and pawn shop operator, has been in a strong long-term uptrend and has repeatedly made this screen.  It has very little debt, a PEG ratio of .83, return on equity of over 20%, and has projected annual earnings growth of 15% over the next 5 years.  The weekly chart courtesy of Finviz is below. From a technical perspective, I would wait for a close above $33 before considering a long entry :

Applied Industrial Technology (AIT) momentum has slowed in recent weeks but it still remains near the top of its range as indicated by the weekly chart below. AIT is an industrial equipment wholesaler. It has a yield of  2.22% and PEG of .87.  It has no debt and has 5 year earnings growth projected at 17% annually:

Ticker Name Industry 6/27/11 Update Rank MktCap PEGLT
AIT Applied Industrial Technologi Misc. Capital Goods Here 98.5 1448.27 0.9
EZPW EZCORP, Inc. Consumer Financial Services Here 97.52 1601.08 0.83
NSR Neustar, Inc Communications Services Here 95.1 1898.46 0.82
TRLG True Religion Apparel, Inc. Apparel/Accessories Here 94.96 716.08 0.76
NSP Insperity Inc Business Services Here 94.49 773.5 0.89
BBBY Bed Bath & Beyond Inc. Retail (Specialty) Here 93.38 14098.18 0.96
FCFS First Cash Financial Services Retail (Specialty) Here 92.81 1218.26 0.91
MDF Metropolitan Health Networks, Healthcare Facilities Here 91.85 200.57 0.72
WTSLA The Wet Seal, Inc. Retail (Apparel) Here 90.49 451.84 0.92
DTV DIRECTV Broadcasting & Cable TV Here 85.94 36661.75 0.74
MA MasterCard Incorporated Consumer Financial Services Here 78.77 33086.45 0.92
CRR CARBO Ceramics Inc. Constr. – Supplies & Fixtures Here 77.12 3470.62 0.97
TNDM Neutral Tandem Inc. Communications Services Here 76.11 586.53 0.95
AVAV AeroVironment, Inc. Aerospace & Defense Here 61.97 758.79 0.68

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30 Stocks for This Week: Investment and Trading Opportunities

Each week I publish stocks to watch for the upcoming week as potential momentum trades or longer-term investments. The stocks below all have a 50k minimum average daily share volume and traded at a 52-week high on strong volume, with a minimum of two times relative volume on Friday, June 24th. In addition, stocks were required to close Friday higher than the open price. The full list with weekly performance is tracked on the right-hand side of Scott’s Investments.

Last week 17 stocks made the cut and this week’s list of 30 stocks is the most we have seen on a list since April. There are several intriguing trade candidates on this week’s list.  Biotech/drug manufacturing remains a hot, speculative industry.  This should come as no surprise as healthcare continues to perform strongly relative to other industries. A comparison of the 3 month performance of XLV (SPDR Health Care ETF) to the S&P 500 is below. XLV is also a top 3 selection in my US Sector ETF Portfolio for June due to its relative strength compared to other sectors:

Multiple stocks on this week’s list were on previous lists, a bullish sign for these individual stocks that accumulation continues.  Caribou (CBOU), GT Solar (SOLR), which was featured in my June 3rd update, EasyLink Services (ESIC), Pharmacyclics (PCYC) and SciClone Pharmaceuticals (SCLN), featured in the May 17th list, are all repeat stocks appearing on this week’s list.

While I track the overall weekly performance of each list, my objective is not to purchase or recommend every stock on the list.  The primary objective is to identify stocks that are either short-term trades or long-term investments.  GT Solar looked like a candidate for both a trade and investment, which was why it was featured on June 3rd. PriceSmart (PSMT) was featured in my 5/6/11 list and had volatile price action in subsequent weeks. After waiting for PSMT to form a wedge pattern, I initiated a long position, betting on a breakout. I like the long-term growth prospects of PSMT and technicals; however, my long position was not initiated until over a month after it appeared on my “Stocks to Watch This Week” list.

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SCLN is not without its fundamental risks, as I detailed on May 17th. However, if it is able to break through $6 it could very likely ascend to $7-8 based on its historical prices levels:
Chart courtesy of Finviz

Caribou Coffee is a stock that is intriguing both from a fundamental and technical perspective. It is trading near an all-time high, meaning there is no overhead resistance:

From a fundamental perspective the company has improved in recent years. After suffering earnings losses from 2007-2009, the company has grown earnings in 2010 and 2011 and has no debt. In addition, it has improved its return on equity to over 46% and is projected to grow earnings this year at 77% and 21% annually over the next 5 years.  It currently trades at a price-to-earnings growth (PEG) ratio of .39. In the short-term, a pullback to $12 would not be surprising and could serve as an entry point.
For today’s market update from MarketClub please click here.

Ticker Company Industry Price Relative Volume
AI Arlington Asset Investment Corp. Investment Brokerage – Regional 31.88 5.83
BBRG Bravo Brio Restaurant Group, Inc. Restaurants 23.93 7.83
CBOU Caribou Coffee Company, Inc. Specialty Eateries 12.97 13.54
CONN Conns Inc. Electronics Stores 8.83 3.8
ECYT Endocyte, Inc. Drug Manufacturers – Major 12.88 12.3
EE El Paso Electric Co. Electric Utilities 31.14 2.65
ELGX Endologix Inc. Medical Instruments & Supplies 9.15 5.01
ESIC EasyLink Services International Corporation Internet Service Providers 5.2 4.42
FTNT Fortinet Inc. Computer Peripherals 25.85 6.68
GCO Genesco Inc. Apparel Stores 51.01 2.57
GHDX Genomic Health Inc. Medical Laboratories & Research 28.37 5.93
HANS Hansen Natural Corporation Beverages – Soft Drinks 78.05 3.21
INFI Infinity Pharmaceuticals, Inc. Research Services 7.92 14.68
IPHS Innophos Holdings Inc Chemicals – Major Diversified 48.91 5.02
KALU Kaiser Aluminum Corporation Aluminum 52.92 2.39
KW Kennedy Wilson Holdings Inc. Property Management 12.15 8.31
LAD Lithia Motors Inc. Auto Dealerships 19.18 3.18
NYMX Nymox Pharmaceutical Corporation Diagnostic Substances 8.9 6.72
OKE ONEOK Inc. Gas Utilities 73.27 2.47
PCYC Pharmacyclics Inc. Drug Manufacturers – Other 10.11 3.22
PEGA Pegasystems Inc. Business Software & Services 43.12 2.21
PRM PRIMEDIA Inc. Publishing – Periodicals 7.11 2.55
QLIK Qlik Technologies, Inc. Business Software & Services 33.39 5.6
SCLN SciClone Pharmaceuticals, Inc. Drug Manufacturers – Other 5.96 3.09
SOLR GT Solar International, Inc. Semiconductor – Specialized 15.3 3.68
SREV ServiceSource International, In Information Technology Services 20.36 3.83
SUG Southern Union Co. Gas Utilities 39.85 16.84
TWIN Twin Disc Inc. Diversified Machinery 36.69 5.43
USAP Universal Stainless & Alloy Products Inc. Steel & Iron 44.5 2.72
WNI Schiff Nutrition International Inc. Drug Stores 10.34 4.59
Disclosures: Long PSMT

10 Top Dividend Growth Stocks Based on Yield and Payout

I published an article today on Seeking Alpha, Top 10 Stocks Based on Yield and Payout Ratio

 I ranked the yields and payout ratios of the 248 stocks with histories of 10+ years of dividend increases. The yield and payout ratio ranks were added to create an average overall rank for each stock.

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Dollar, gold, silver, oil and the SP500

Chris Vermeulen has a video update on yesterday’s market action. The video is here, his summary is below:

Yesterday was do or die day for stocks and commodities to breakout but they failed once again at resistance. 

The US Dollar in overnight trading has made a strong move up and that is putting pressure on stocks and commodities. 

Gold touched a key resistance level yesterday as expected and sellers quickly sold it back down along with silver. 

Crude Oil continues to pullback to our target of $88 per barrel. 

We continue to let the market work it’s self out before taking anymore action.

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Investment Reads

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Below are a few investment articles for the middle of the week:

Great slideshow on dividend investing from Nuveen. For those new to the site, I track a high yield/low payout portfolio using Dividend Champion stocks (stocks with a history of raising dividends 25+ years). The portfolio can be tracked on the right hand side of the page under “High Yield Dividend Champion Portfolio”  See also Alpha Hiding in Plain Sight? (pdf) by Lowell Miller for a summary of dividend stock returns.

When’s the Last Time Housing Prices Were This Low? The Big Picture

Greek Yields: “Certain Default, But No Yet” – John Hussman

Economic & Copper Advisory Services: Economic Report June 2011 (pdf) – John Mauldin’s Outside the Box

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10 Micro Cap Value Stocks – Or Are They?

On a monthly basis I conduct a close replication of AAII’s (American Association of Individual Investors) Shadow Stock screen. The goal is to find small, undervalued stocks with high price momentum over the past 52 weeks.  It is a highly speculative, risky strategy that can potentially undercover a hidden gem or two.

The screen and date below is courtesy of Stockscreen123. I use the following screen criteria to identify high momentum value stocks:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

The results for this month are at the bottom of the article and last month’s list is here.   Much discussion and investigation has occurred in recent week and months about Chinese firms trading in the US markets.   The Chinese companies under the most scrutiny are those which began trading in the US via reverse mergers, which is the practice of a private company acquiring a public company (many times penny stocks which have little or no value) in order to bypass the lengthy and expensive process of going public.  Allegations (and in some cases proof) of accounting fraud have plagued the Chinese small-cap sector, especially those companies which began trading via reverse mergers.  The Street has been tracking the reverse merger soap opera and their recent update is here

How can an investor avoid getting duped by fraudsters? The easiest option is to avoid investing altogether and store your assets in the ground or in hard assets.  In today’s market you could avoid markets where the concern is greatest, Chinese small-cap stocks.  An easier method is to let the market tell you when concern begins.  Using a trend method to determine when and how to invest is one way to follow what the market is telling you.  When a stock breaks below a long-term moving average (such as a 200-day, 50-day, 10 month, etc.) it could be a sign that further weakness is ahead. Also, tracking a stocks relative strength or performance over a longer time period is also useful for determining if the market has concerns about a company.

No method is fool-proof and this month’s list has two Chinese firms, Fuwei Films (FFHL) and China Techfaith Wirelss (CNTF). The screen is mechanical, so these two companies automatically appeared on this month’s list.   FFHL has been highly volatile in recent months.  While its 52-week price performance is solid, it is below its 200 day and 50 day moving averages. Its one month performance is -42.64% (CNTF is down over 37% for the month).  Clearly the stock is struggling despite its 52 week performance.   The company was in danger of being delisted this spring due to ownership issues related to three of its major shareholders who were convicted in China of fraud related to the company’s 2006 IPO (full story here).  However, the company announced on May 19th that it regained compliance with Nasdaq after the ownership of the shares were transferred to a third party.

No official news by the company in the past month can account for the significant share decline.  However, the entire Chinese small-cap sector has struggled as new accounting issues in the sector are revealed.   The company is facing anti-dumping duties imposed by the US Department of Commerce but this was public news several months ago.  With all this being said, it is safe to say FFHL is not without its significant risks despite its apparent low valuation.

Are all Chinese stocks fraudulent? No. But clearly there are significant issues in the sector and more companies could prove to be operating under false pretenses.  The issue right now is trust – nobody wants to put their money in a sector where what you see may not be what you actually get.  Investors of companies that make it through the increased scrutiny unscathed could be richly rewarded if they enter at depressed levels; however, substantial risk still abounds in the sector due to a lack of trust and transparency.  For now, the simplest indicator of trust for a sector in which there is no trust is to follow each stock’s trend. Despite the strong 52 week performance, the short-term trend in FFHL and CNTF are screaming sell, especially for moderate to conservative investors.

Ticker Name Market Update 6/21 Rank MktCap Pr2 SalesTTM Pr2 BookQ Pr 52W%Chg
GFN General Finance Corporation Here 98.5 65.82 0.38 0.6 164.59
FFHL Fuwei Films (Holdings) Co., L Here 97.95 29.9 0.33 0.34 143.62
ABL American Biltrite Inc. Here 94.96 29.29 0.14 0.57 93.85
APWC Asia Pacific Wire & Cable Here 94.21 67.08 0.14 0.43 85.11
PARL Parlux Fragrances, Inc. Here 92.18 64.14 0.52 0.63 71.67
KSP* K-Sea Transportation Partners Here 88.26 156.35 0.59 0.72 55.13
TGX Theragenics Corporation Here 87.21 63.71 0.78 0.79 51.61
MDH MHI Hospitality Corporation Here 83.37 29.05 0.37 0.76 42.92
COBR Cobra Electronics Corporation Here 81.52 22.17 0.2 0.64 39.51
CNTF China Techfaith Wireless Comm Here 73.95 186.86 0.65 0.67 30.26

*being acquired

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Are Gold Miners Set to Explode?

In January 2009 I wrote an article detailing John Hussman’s research on Gold and Gold Miners and I suggested at the time that GDX could be a profitable trade.  Hussman’s analysis showed that gold miner’s perform very well historically when the economy is contracting and the ratio of gold to XAU (Gold and Silver Index) is above 5.  The current spot gold/XAU ratio is 8.09….

Please click here to read the rest of my article on Seeking Alpha.

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